Fitch Rates Overton Power Dist. No. 5, NV's Revs 'BBB+'; Outlook Positive
Fitch Ratings has assigned a 'BBB+' rating to Overton Power District No. 5 (OPD5), Nevada's implied revenue bonds.
The Rating Outlook is Positive.
The ratings take into account approximately $14.9 million of outstanding debt obligations but is assigned to implied obligations as none of the district's debt is publicly held. Previously outstanding revenue bonds were recently defeased or refunded.
The district's obligations are secured by and payable from net revenues of the electric system.
KEY RATING DRIVERS
RELATIVELY SMALL DISTRIBUTION SYSTEM: OPD5 is a relatively small distribution system serving a predominately residential customer base of 14,500 in a rural service territory northeast of Las Vegas. The utility's rate base is moderately concentrated with the top 10 customers accounting for approximately 27% of MWh sales and operating revenues in 2014.
STABILIZING FINANCIAL PERFORMANCE: The Positive Outlook reflects Fitch's expectation that future financial performance will support debt service coverage of 1.3x or better, similar to results in 2013 and 2014. OPD5's financial results improved and stabilized in 2013 following a multiyear period of very thin coverage of around 1x.
SOUND LIQUIDITY: The district's available cash increased to approximately $7.6 million or 93 days cash on hand in 2014. A $5 million line of credit with CFC provides additional support, raising liquidity on hand to 155 days.
UNCERTAIN LONG-TERM POWER SUPPLY: The district's wholesale power supply contract with Arizona Public Service (APS) expires at year-end 2017. Management plans on securing a post-2017 power supply in the near future.
STABILIZING SERVICE TERRITORY: The district's service territory was significantly affected by the recession and has lagged the nation and surrounding metro areas in its recovery. However, local conditions appear to be improving, with a growing customer base, modest MWh sales growth following several years of decline, and on-going development in the area that may add a few significant customers.
FINANCIAL STABILITY & POWER SUPPLY: Continued financial stability, together with a favorable resolution of Overton Public Utility District No. 5's post-2017 power supply, would likely lead to a rating upgrade over the next two years.
OPD5 is located approximately 65 miles northeast of Las Vegas and provides electric service to a largely residential customer base of 14,523 (2014). OPD5's exclusive service territory is largely rural but includes the city of Mesquite, NV (population 18,262), which has been the focal point for most of OPD5's customer growth.
The local economy appears to be stabilizing after a slow recovery that lagged the nation and nearby metro areas. This improvement is apparent in the recent uptick in customer growth, which had slowed during and directly after the recession, and in the modest 0.7% growth in MWh sales in 2014 following five consecutive years of decline.
OPD5's rate base is moderately concentrated with its top 10 customers accounting for approximately 27% of MWh sales and operating revenues in 2014. Management reports that several significant customers could establish operations within the district over the next 18 months, positively affecting sales and revenues.
IMPROVED FINANCIAL PERFORMANCE
Financial operations improved in 2013 and remained stable in 2014 following rate increases in 2011 and 2012. Operating margins improved to 14% in 2014 compared 9.9% in 2012. Stronger operations bolstered debt service coverage, raising coverage levels to 1.35x and 1.42x in 2014 and 2013, respectively, a considerable improvement compared to the near 1x coverage in the preceding three years.
OPD5's liquidity levels remain sound. At the end of 2014, cash on hand was approximately $7.6 million or 93 days. Liquidity needs are further supported by a $5 million line of credit with CFC that raised overall liquidity levels to 155 days in 2014.
Management's financial forecast shows relatively stable operations through 2017 with an assumed 1% annual MWh sales growth rate. Debt service coverage levels are expected to remain above 1.30x and cash levels above $7 million over the projected timeframe.
MEDIUM-TERM POWER SUPPLY CONTRACT
The district's principal power supply contract with APS is relatively short-term when measured against similar systems, which exposes it to some degree of longer-term cost uncertainty. However, management expects to secure a replacement power supply for the post-2017 period in the near future.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)
Dodd-Frank Rating Information Disclosure Form
Fitch Ratings, Inc.
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